Edison International 10-Q Summary
Business context and reporting period
Edison International operates primarily through Southern California Edison Company (SCE), a regulated electric utility serving central, coastal and southern California, and Edison Mission Group (EMG), a competitive power-generation and renewable-energy business. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, with comparisons to the same periods in 2009.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total operating revenue | $2.741 billion, versus $2.834 billion | $5.552 billion, versus $5.646 billion |
| Operating income | $351 million, versus $(364) million | $851 million, versus $188 million |
| Net income attributable to Edison International | $344 million, versus $(16) million | $580 million, versus $234 million |
| Basic EPS | $1.05, versus $(0.05) | $1.77, versus $0.72 |
| Operating margin | Approximately 12.8%, versus negative 12.8% | Approximately 15.3%, versus 3.3% |
| Dividends declared per common share | $0.315, versus $0.31 | $0.63, versus $0.62 |
The improvement in reported earnings was substantially affected by the absence of the large 2009 cross-border lease termination and Global Settlement charges. Second-quarter 2010 earnings also included a $138 million tax benefit related to the Global Settlement and a $40 million tax benefit from a change in the tax accounting method for asset removal costs.
- SCE: Net income attributable to Edison International was $301 million for the quarter and $465 million year to date, compared with $499 million and $707 million in 2009. SCE core earnings increased to $248 million for the quarter and $451 million year to date, from $199 million and $407 million.
- EMG: Net income attributable to Edison International was $27 million for the quarter and $104 million year to date, compared with losses of $558 million and $510 million. Core earnings declined to $(32) million for the quarter and $38 million year to date, from $61 million and $118 million.
- Cash flow: Consolidated operating cash flow was $962 million for the first six months, compared with $883 million in 2009. Capital expenditures were $2.070 billion, compared with $1.540 billion. Investing cash outflows were $2.205 billion, and financing cash inflows were $438 million.
- Liquidity: Cash and equivalents declined to $868 million at June 30, 2010, from $1.673 billion at December 31, 2009. SCE had approximately $91 million of cash and short-term investments and $2.668 billion of available credit capacity. The parent had approximately $27 million of cash and $1.211 billion of available credit capacity. EMG had $746 million of cash and $961 million of credit capacity.
- Debt: Consolidated long-term debt, including the current portion, was $11.155 billion at June 30, 2010, compared with $10.814 billion at year-end 2009. Total short-term debt was $495 million, compared with $85 million. The consolidated debt-to-total-capitalization ratio was 0.53, below the 0.65 covenant limit.
Material changes versus the prior comparable period
- Revenue declined 3% for both the quarter and six months, primarily reflecting lower competitive power-generation revenue and lower SCE sales volumes, partly offset by approved rate increases.
- Reported profitability improved sharply because 2009 included an $866 million quarterly and $888 million year-to-date lease-termination expense, along with significant Global Settlement-related charges.
- SCE core earnings improved because of higher authorized revenue supporting rate-base growth, lower income taxes and higher AFUDC, partly offset by higher operating and maintenance costs, depreciation and outage-related expenses.
- EMG core earnings weakened because of scheduled coal-plant outages, lower realized energy revenue, lower generation, higher maintenance costs and $17 million of unrealized hedge losses in the quarter and year to date. Energy-trading results improved.
- Adoption of new variable-interest-entity guidance resulted in deconsolidation of assets totaling $683 million, consolidation of $99 million of assets and a $15 million increase to retained earnings at January 1, 2010. The Big 4 projects were deconsolidated and are now accounted for under the equity method.
- Capital spending accelerated, particularly at SCE, while cash declined because investing outflows exceeded operating and financing inflows.
Guidance, outlook, commentary and risks
- SCE forecasts 2010 capital investments of $3.3 billion to $4.0 billion and aggregate 2010–2014 capital spending of $18 billion to $21.5 billion. SCE invested approximately $1.5 billion during the first six months.
- SCE indicated that its expected 2012 general rate case filing would request a $6.3 billion base-rate revenue requirement, approximately $903 million above projected 2011 base-rate revenue. The request remains subject to CPUC approval.
- EMG expected approximately $635 million of capital expenditures during the remainder of 2010, excluding the disputed $289 million turbine obligation, funded through project financing, grants, cash and operating cash flow.
- Midwest Generation estimated that retrofitting all units with dry-scrubbing technology to meet sulfur-dioxide requirements could cost approximately $1.2 billion. The company may instead retrofit selected units, shut down units or defer decisions depending on market and regulatory conditions.
- Environmental and regulatory risks include the proposed federal Transport Rule, coal-combustion-waste regulation, California renewable procurement requirements, once-through-cooling requirements and potential additional controls at Homer City.
- Legal contingencies include the Homer City New Source Review notice of violation, the Midwest Generation New Source Review litigation, the Navajo Nation litigation seeking at least $600 million of damages and $1 billion of punitive damages, and the Mitsubishi turbine dispute involving approximately $289 million of remaining disputed payments and $68 million of deposits.
- SCE’s FERC rate case remains subject to refund, with a final decision expected in the second half of 2011. SCE also had potential additional collateral requirements of approximately $180 million if its credit rating fell below investment grade.
- EMG’s credit ratings were downgraded by Moody’s in June 2010. EMG estimated that margin and collateral requirements could increase by approximately $184 million under adverse market conditions.
- Management stated that disclosure controls and procedures were effective as of June 30, 2010 and that no material changes occurred in internal control over financial reporting.
Most important facts for investors to verify
- Separate recurring SCE earnings from nonrecurring tax benefits and other Global Settlement-related items.
- Monitor EMG’s coal-plant operating performance, outage schedule, power prices, capacity prices and hedge results.
- Assess the funding requirements and regulatory recovery prospects for SCE’s $18 billion to $21.5 billion capital program.
- Evaluate potential environmental compliance costs, including the estimated $1.2 billion Midwest Generation retrofit program and possible Homer City requirements.
- Track liquidity, short-term borrowing, credit ratings, collateral requirements and compliance with debt covenants.
- Follow the FERC rate case, SCE’s 2012 general rate case, nuclear and once-through-cooling proceedings, and major environmental litigation.
- Confirm the outcome and financial impact of the Mitsubishi turbine dispute and the Navajo Nation litigation, which the filing states cannot currently be estimated clearly.